Hardening Positions on Tax Policy Suggest Hard Times Ahead

Donald Lambro

10/12/2012 12:01:00 AM - Donald Lambro

WASHINGTON -- No other issue is paralyzing the U.S. economy more than the unsettled question of where taxes are headed in the years to come.

That question, raised by a tidal wave of expiring tax cuts that will hit most of us on Jan. 1, is the chief cause of the uncertainty that has swept through our economy, stalling business expansion, capital investment and job creation.

The issue is further complicated by Obamacare and a regulatory maze of mandates, tax increases, penalties and fees that will hit businesses and middle-class Americans alike.

Why hire more workers when the feds could soon show up at your office to tell you how much more it's going to cost your struggling business?

Tax policy is at the center of the "fiscal cliff" toward which we are headed, threatening to raise taxes for 90 percent of Americans when the economy is weakening, consumers are pulling back and the business community is shifting into neutral.

And it appeared this week that the tax battle lines were hardening between Democrats and Republicans in the run-up to the Nov. 6 elections.

President Obama says he will not approve any interim plan to avoid going over the cliff that does not significantly raise the top two income tax rates: the 28 percent rate to 36 percent, and the 35 percent rate to nearly 40 percent.

New York Sen. Charles Schumer, the Senate's No. 3 Democrat, made it clear Tuesday that this is going to be the party line in a bitter post-election fight that economists say could push the economy into yet another recession.

"These promises of lower rates amount to little more than happy talk when the math behind them doesn't add up," Schumer said in a speech at the National Press Club. "It is an alluring prospect to cut taxes on the wealthiest people and somehow still reduce the deficit. But you can't have your cake and eat it, too."

Schumer's political salvo, in a war that begins the day after the presidential election, was met with this withering statement from Senate Minority Leader Mitch McConnell of Kentucky:

"Senior Democrats are now openly acknowledging their plan to hold the economy hostage to massive, job-killing tax hikes, and espousing the fiscally irresponsible view that says the country should be driven off the fiscal cliff," McConnell said.

But while the Democrats clearly want to play short-term politics with this incendiary issue, a longer-term tax-reform movement is gaining strength. It is one that would reduce tax rates to give the economy new incentives for growth, yielding increased revenues that in turn will reduce the budget deficits.

This is at the core of Republican presidential nominee Mitt Romney's long-term economic agenda to put the U.S. on a faster growth curve that will erase the uncertainty that is holding the economy back.

Romney wants to extend the Bush tax cuts into 2013 in order to give a new Congress working room to overhaul the tax code. His proposal is based on President Reagan's pro-growth 1986 reforms that cut the rates, but reduced or repealed many of the federal code's exemptions, credits, loopholes and assorted corporate welfare -- making the tax reductions revenue-neutral.

That's what Obama's 2010 fiscal commission proposed in its plan to slash the deficit and debt, but it was given the cold shoulder by both the White House and Democratic leaders in Congress. The idea went nowhere under his presidency.

Nevertheless, there is strong support for the plan among Republicans and notable support in some sectors of the Democratic Party.

Earlier this summer, Bill Clinton urged Obama to extend the Bush tax cuts at year's end in order to give Congress time to tackle the insanely complicated tax code and lower the rates in 2013. He warned both the White House and Democrats in June "to avoid doing anything that would contract the economy now."

Former Clinton chief of staff Erskine Bowles, who co-chaired Obama's fiscal commission, has been crusading for a tax reduction overhaul ever since.

But there is no signal from the Obama campaign or the White House that they want to go down that road. They are married to higher income taxes on the rich, no matter how weak the economy is or how many jobs are lost.

Schumer "is making the important point here that the wealthiest must pay their fair share in any balanced approach to reducing our deficit," a White House official told The Washington Post Tuesday.

This is a clear signal that Obama, whose campaign has been all about class warfare instead of growth economics, persists in his opposition to broadening the tax base and reducing the tax burden on a bedridden economy.

Obama, Schumer and their Democratic allies continue to argue that tax-reduction incentives will not improve the economy, that "the numbers don't add up." But they did work under Reagan, who cut taxes across the board in his first term and then reduced them further in his second term -- and he did it with Democratic support in Congress.

But by 2012, Obama's first two quarterly growth rates were 2 percent and a barely breathing 1.3 percent. Third-quarter estimates are about 1.5 percent.

When he was running for president on a platform for across-the-board tax cuts to "get the economy moving again," John F. Kennedy dealt with the tax fairness issue by saying, "A rising tide lifts all boats." Despite all of the naysayers, the economy strengthened, and by the end of the 1960s we had a balanced budget.